ALFI condemns Financial Transaction Tax and troika of misconceptions

By: Jonathan Boyd | 05 Mar 2013

The imposition of a Financial Transaction Tax (FTT) in Europe will “mean the death of European fund industry”, according to a statement put out by the Association of the Luxembourg Fund Industry (Alfi)

In a statement, the Association,said that the FTT, as proposed by the European Commission in the form of a Council Directive, would end up being imposed across all EU member states, regardless of whether they opted for the tax or not.

Alfi believes that there are a number of misconceptions that the FTT is based on, and which, if it goes ahead, will contribute to the destriction of the European funds industry.

Misconception one

As calculations from the European Fund and Asset Management Association (EFAMA) have shown, the tax will not ultimately be paid by the financial institutions, but by savers and investors in European investment funds, Alfi said.

“This tax risks limiting European savers’ access to high-quality, professionally-managed savings products. Ultimately, this tax will have an extremely negative impact on all long-term savings of European Union nationals, including pension funds.”

“For this reason investment funds, which neither caused nor exacerbated the crisis, should not be included within the scope of the Financial Transaction Tax,” said Marc Saluzzi, Chairman of ALFI.

Misconception two

In its efforts to curtail damaging speculation, the FTT would hurt funds that are represent low risk investments.

It said one example was money market funds, which at 31 December 2012 represented approximately 16% of European assets under management, or €1.05trn. Such funds are invested in low risk securities, such as treasury bills or short term bonds.

“This is why they are a commonly used savings product both for institutional and retail clients. More generally, the FTT risks damaging funds investing in shares, bonds or both. This, in turn, would have a devastating effect on the long-term financing of the European economy,” Alfi said.

“Nonetheless, the Commission and the 11 countries involved in the process of enhanced cooperation believe that they will recover tens of billions of euros through this tax.”

Misconception three

The FTT will not reap the expected revenue, said Alfi.

It points to similar taxes introduced in the past in Sweden and Australia. These suggest the “tax will be avoided and any activity which falls into the scope of the tax will relocate, so the tax base will disappear.”

“Taking the example of money market funds again, these have to invest and disinvest continuously according to inflows and outflows and in the interest of their investors. Under the proposals, they would therefore be taxed continuously and will no longer be able to generate a positive return. They will soon disappear, together with related jobs and activity, as well as a large part of the expected revenue.”

Alfi added that the FTT threat did not just apply to funds within Europe. Ucits would be cought up, threatening the growth in exports Ucits have enjoyed into regions such as Latin America, the Middle East and Asia.

“Ultimately, the European market for investment funds as a whole will suffer considerably from the introduction of an FTT. Between 2007 and 2011, the market share of European industry in the global management fell from 35% to 31% in terms of assets under management, and this negative trend will only be increased by this measure,” Alfi said.